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An overview of
the Forex market
The Forex market is a non-stop cash
market where currencies of nations are traded, typically
via brokers. Foreign currencies are constantly and
simultaneously bought and sold across local and global
markets and traders' investments increase or decrease in
value based upon currency movements. Foreign exchange
market conditions can change at any time in response to
real-time events. |
The main enticements of currency dealing to private investors and
attractions for short-term Forex trading are:
- 24-hour trading, 5 days a week with non-stop access to
global Forex dealers.
- An enormous liquid market making it easy to trade most
currencies.
- Volatile markets offering profit opportunities.
- Standard instruments for controlling risk exposure.
- The ability to profit in rising or falling markets.
- Leveraged trading with low margin requirements.
- Many options for zero commission trading.
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Forex trading
The investor's goal in Forex
trading is to profit from foreign currency movements. Forex
trading or currency trading is always done in currency pairs.
For example, the exchange rate of EUR/USD on Aug 26th, 2003 was
1.0857. This number is also referred to as a "Forex rate" or
just "rate" for short. If the investor had bought 1000 euros on
that date, he would have paid 1085.70 U.S. dollars. One year
later, the Forex rate was 1.2083, which means that the value of
the euro (the numerator of the EUR/USD ratio) increased in
relation to the U.S. dollar. The investor could now sell the
1000 euros in order to receive 1208.30 dollars. Therefore, the
investor would have USD 122.60 more than what he had started one
year earlier. However, to know if the investor made a good
investment, one needs to compare this investment option to
alternative investments. At the very minimum, the return on
investment (ROI) should be compared to the return on a
"risk-free" investment. One example of a risk-free investment is
long-term U.S. government bonds since there is practically no
chance for a default, i.e. the U.S. government going bankrupt or
being unable or unwilling to pay its debt obligation. |
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